We offer for implementation both ready-made trading strategies, including the most popular ones. Active trading is the act of buying and selling securities based on short-term movements in order to profit from price movements on a short-term stock chart. The mentality associated with an active trading strategy is different from the long-term buy and hold strategy common among passive or indexed investors. Active traders believe that short-term moves and capturing the market trend is where they make their profits.
There are various methods used to implement an active trading strategy, each suited to the market environment and the risks inherent in the strategy. Here are the four most common active trading strategies and the built-in costs of each strategy.
Active trading is a strategy that involves "beating the market" by identifying and timing profitable trades, often within short holding periods.
As part of active trading, there are several general strategies that can be used.
Day trading, position trading, swing trading and scalping are four popular active trading methods.
4 Common Active Trading Strategies
1. Day trading
Day trading is perhaps the most famous style of active trading. It is often considered an alias for the most active trading. Day trading, as its name suggests, is a method of buying and selling securities within the same day. Positions are closed the same day they are opened and no positions are held overnight. Traditionally, day trading is done by professional traders such as specialists or market makers. However, e-commerce has opened up this practice to beginner traders.
Active trading is a popular strategy for those who are trying to beat the market average.
2. Position trading
Some actually consider position trading to be a buy and hold strategy rather than active trading. However, position trading, if performed by an experienced trader, can be a form of active trading. Position trading uses long-term charts - from daily to monthly - in combination with other methods to determine the trend of the current direction of the market. This type of trade can last from a few days to a few weeks, and sometimes longer, depending on the trend.
Trend traders look for consecutive higher highs or lower highs to determine the trend of a security. By jumping on and riding the wave, trend traders seek to capitalize on both up and down market movements. Trend traders seek to determine the direction of the market, but they do not try to predict any price levels. Typically, trend traders jump on a trend after it has established itself, and when the trend breaks, they usually exit the position. This means that during periods of high market volatility, trend trading becomes more difficult and her positions tend to shrink.
3. Swing trading
When a trend breaks, swing traders usually jump in. At the end of a trend, there is usually some price volatility as the new trend tries to establish itself. Swing traders buy or sell as price volatility sets in. Swing trades usually take place over one day, but for a shorter time than trend trades. Swing traders often create a set of trading rules based on technical or fundamental analysis.
These trading rules or algorithms are designed to determine when to buy and sell a security. While a swing trading algorithm does not need to be accurate and predict the peak or trough of a price movement, it needs a market that is moving in one direction or another. A range-bound or sideways market is a risk for swing traders.
Scalping is one of the fastest strategies used by active traders. Essentially, this entails identifying and exploiting bid/ask spreads that are slightly wider or narrower than normal due to temporary supply/demand imbalances.
The scalper does not try to use large moves or trades in large volumes. Rather, they are looking to capitalize on small movements that occur frequently, with measured transaction volumes. Since the level of profit per trade is low, scalpers look for relatively liquid markets in order to increase the frequency of their trades. Unlike swing traders, scalpers prefer calm markets that are not subject to drastic price fluctuations.
Costs Inherent in Trading Strategies
There is a reason active trading strategies were once used only by professional traders. Having your own brokerage house not only reduces the costs associated with high-frequency trading, but also ensures better trade execution.12 Lower fees and better execution are two elements that increase the profit potential of strategies.3
Successful implementation of these strategies usually requires significant hardware and software purchases. In addition to real-time market data, these costs make active trading somewhat prohibitive for the individual trader, though not entirely unattainable.4
This is why passive and indexed strategies that follow a "buy and hold" position offer lower commission and trading costs, as well as lower taxable events if a profitable position is sold. However, passive strategies cannot outperform the market as they hold the broad market index. Active traders are looking for "alpha" in the hope that trading profits will exceed costs and ensure a successful long-term strategy.
Active traders may use one or more of the above strategies. However, before deciding to engage in these strategies, the risks and costs associated with each should be considered.